TORONTO, Jan 19 (Reuters) - Canada's dollar weakened to its
lowest point in almost a week against its U.S. counterpart on
Wednesday after the Bank of Canada warned in a key report that
the strong domestic currency would temper growth.

The central bank said in its quarterly Monetary Policy
Report that growth will pick up speed this year after a sharp
slowdown in the third quarter of 2010, but a strong Canadian
dollar will mute a much-needed recovery in exports.
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And Bank of Canada Governor Mark Carney said Canada has
become less competitive because of poor relative productivity
performance.

"Canada hasn't seen productivity gains you would have liked
to have seen. So in this case, it means that you'll have
sections of the economy ... that are now less competitive than
before," said Sacha Tihanyi, a currency strategist at Scotia
Capital.

"Instead of currency strength coming from productivity
gains, it happens in the absence ... which can put some stress
on the economy."

That stress to the economy is seen making it less likely
that that central bank will rush to resume the rate hike
campaign it started last year.

The Canadian dollar fell from a 2 1/2-year high on Tuesday
after the bank kept its key policy rate steady at 1 percent and
used unexpectedly dovish language in its policy statement.
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"This report just substantiates the message of the press
statement that the bank will probably not raise rates in March,
maybe not for a few more months," said Sal Guatieri, a senior
economist at BMO Capital Markets.

Most of Canada's primary dealers polled on Tuesday expect
another rate increase in the first half of this year, although
they differ on the timing. [CA/POLL]

FACTORY SALES SLIP

The currency CAD=D4 finished the day at C$0.9955 to the
U.S. dollar, or $1.0045, compared with C$0.9929 to the U.S.
dollar on Tuesday. It hit a session low of C$0.9966 to the U.S.
dollar, or $1.0034, after the report.

"No real CAD-supportive remarks came out of the MPR," said
Tihanyi.

Weaker-than-expected Canadian manufacturing data on
Wednesday added to concerns about Canada's fourth-quarter gross
domestic product report and weighed on the Canadian dollar.
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"That suggests the economy was fairly flat in November and
probably had a few analysts revising down their fourth quarter
growth estimates," said Guatieri.

Economic data south of the border also weighed on the
currency, with U.S. housing starts falling to the lowest rate
in over a year, suggesting the battered U.S. housing sector
continued to be a roadblock in the country's recovery. The
United States is Canada's largest export market.

U.S. crude prices, which eased for a second day on worries
about the U.S. recovery, also weighed on the currency as Canada
is a major energy exporter. [O/R]

Canadian government bond prices were firmer across the
curve, helped by the view a strong currency could delay Bank of
Canada rate increases. Both Canadian and U.S. government bonds
also benefited from safe-have demand triggered by a decline in
stock markets. [US/]